Quality review and its future vs. peer review and its failure

Webster's New Collegiate Dictionary has some fascinating verbiage for "peer," i.e., "to look narrowly or cautiously; to look searchingly at something difficult to discern; to come slightly into view; emerge partly."I also liked "a member of one of the five ranks (as duke, marquess, earl, viscount or baron) of British peerage."

Grumet's thesis is that the success of a system of peer review depends on the qualifications of the peer reviewers.

Not so.

For purposes of this discussion, I refer to and prefer "quality review," rather than peer review. An examination of the 25-year span of the peer review concept within the accounting profession reveals some amusing aspects. For example, the peer review process attendant to audits of publicly owned companies reached its climax in December 2001. For years, the Big Eight, Big Six and then the Big Five peer reviewed each other, exchanging peer review fees reputed to be in the neighborhood of $500,000 (a nice neighborhood!). Despite scandals at Lincoln Savings and Loan (audited by Arthur Young), Baptist Foundation of Arizona (Andersen), CUC (Ernst & Young) and Adelphia Communications (Deloitte & Touche), the peer review reports always concluded with a commendation for an "unmodified" or clean opinion.

In December 2001, Joseph Berardino, Andersen's chief executive, received a letter of congratulations on the peer review conducted by Deloitte & Touche months after whistleblower Sherron Watkins advised Enron chairman Kenneth Lay that there was an implosion in the offing with an Enron aneurysm.

Congress cured that failure with the passage of Sarbanes-Oxley and reviews of work products produced by independent accountants of publicly owned corporations. Now, quality reviews are performed by Public Company Accounting Oversight Board inspectors, not retained by the Big Four.

Now let's turn to the other segment of the profession, with thousands of accounting units that do not conduct audits of publicly held companies and that were subject to peer reviews performed by so-called peer review experts. We heard new terms such as team captains and team members. Suddenly, there appeared on the scene a cottage industry of groups claiming expertise in conducting peer reviews. Some of us were surprised when we received multiple solicitation letters for peer reviews by some of these review experts.

Over the years, there were meetings, writings and discussions pertaining to "how to be an effective reviewer." However, when recommendations were made for rotation of firm reviewers and rotation of team captains, such suggestions were rejected.

What am I leading up to?

Irrespective of the content of the peer review reports, praiseworthy or not, what effect did the reviews have? Frequently, some accounting firms advised their clients of the excellence of their reviews - other firms did not. Some firms retained the same peer reviewers year in and year out. Was there a certain amount of fraternity and camaraderie between the reviewed firm and the reviewers? Of course!

It is basic and vital that the quality review of practicing accountants be supervised and implemented by a government agency with disciplinary authority. Supervision of public company audits by the PCAOB is now the rule, and it has the authority to discipline errant auditors. The obvious bodies to review, control, establish standards for, and impose meaningful discipline for quality review of non-public audits are the 54 state boards of accountancy, or specifically designated state agencies.

Remuneration for quality reviewers should be determined by these bodies, and the mechanics of payment of quality reviews should be set in such a manner that the state agencies are adequately compensated for their efforts. Obviously, many individuals will not be enamored of this new concept. (The United States Chamber of Commerce has already initiated a movement to emasculate the Sarbanes-Oxley Act.)

Mr. Grumet is a lawyer, not a CPA, and his criticisms of the current peer review process are, in all likelihood, shared by many observers. It is up to thinking CPAs and state boards of accountancy to have the will, intelligence and public interest to provide the leadership for a long-needed correction.

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